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Good Faith Settlement Of Claims In Excess Of Policy Limits Against Multiple Insureds

September 21, 1999

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 13, #10, p. 21 (September 21, 1999). © Copyright Butler 1999.(1)


Insurers and insureds alike may find themselves in the dark when claims against multiple insureds exceed policy limits. Only a few jurisdictions explicitly have addressed how policy proceeds should be allocated in this situation. The jurisdictions that have addressed the issue have split into two general camps. Some hold that carriers must allocate proceeds proportionately among all insureds. Other jurisdictions hold that a carrier need only act in “good faith” and may settle on behalf of fewer than all insureds. The manner of proportional allocation and the characteristics of a “good faith” settlement under such circumstances are not well described in the case law.

Proportional Allocation Required for Good Faith Settlement

Several jurisdictions hold that policy proceeds must be allocated proportionately so that each insured obtains the same percentage of protection against the liability assessed. One of the oldest cases standing for this proposition is Smoral v. The Hanover Ins. Co.(2) In that case, Smoral drove a car owned by Syracuse and injured Whitaker, the passenger in the car, during an accident. Whitaker sued Smoral and its Syracuse’s President, Goldberg.

Syracuse’s automobile liability insurer, Hanover, disclaimed coverage for Smoral. Smoral’s auto liability insurer, Glens Falls, sued Hanover, seeking a declaration that Smoral was a permissive user and therefore an additional insured under the Hanover policy. Hanover then assumed Smoral’s defense in the Whitaker action.

Hanover’s policy limits were $50,000. Hanover believed that Whitaker’s damages exceeded policy limits and therefore agreed with Whitaker to pay policy limits in exchange for a release of Syracuse and Goldberg. The release specifically reserved Whitaker’s rights against Smoral. Hanover did not notify Smoral of the negotiations for the release. Smoral did not consent to the release.

Hanover continued to represent Smoral until the trial court determined that Hanover’s interests were in conflict with those of Smoral and required Hanover to withdraw. Glens Falls then assumed the defense of Smoral, settled for $32,500 and sued Hanover to recover its settlement on behalf of Smoral. The trial court dismissed the complaint, but the New York appellate court reversed.(3)

The court held that Hanover continued to owe a duty of good faith to Smoral. This duty required an adequate protection of Smoral’s interests and prevented Hanover from preferring one of its insureds over another. According to the Smoral court:

It is absolutely no answer for the company to say that it paid the full amount of its policy if in so doing it fully protected one of its insureds and left the other completely exposed. While it is easy to see why Hanover acted as it did — the insured it protected was a policyholder, the one whose rights it ignored was an insured and it was required by law to defend — there is no legal justification for its preferring one over the other.

While the Smoral court found that Hanover clearly breached its duty to Smoral, it struggled to determine damages. The court noted that Smoral appeared entitled to the value of a defense resulting from Hanover’s “equivocal position” resulting from Hanover’s conflict of interest. However, the court was “not impressed” by Smoral’s argument that a jury would perceive the settlement on behalf of Syracuse and Goldberg as an admission of liability, therefore enhancing the amount of a jury’s verdict and forcing Smoral to pay more in settlement than he would have otherwise paid. The Smoral court did not state how policy proceeds should be apportioned.(4)

California has adopted a similar position, ruling that an insurer’s good faith duties extended to all insureds. In Lehto v. Allstate Ins. Co.,(5) an appellate court reversed a multi-million dollar stipulated judgment against a carrier that had refused to settle on behalf of one insured at the expense of another. In that case, Raul Carbajal was involved in an accident where several people were injured. Gary Lehto was the most seriously injured victim and suffered permanently disabling injuries.

Allstate provided coverage for the vehicle driven by Raul Carbajal through a policy with Raul’s father, Israel Carbajal. The policy provided $25,000 per person and $50,000 per accident in coverage.

Allstate interpleaded its $50,000 policy limits into the court. Lehto refused to accept policy limits that would result in a dismissal of the Carbajals. Allstate would not pay Lehto without a release of the Carbajals. Lehto subsequently offered to settle on behalf of Israel, but not Raul Lehto. Allstate again rejected the settlement offer.

The Lehtos and Carbajals then stipulated to a judgment in the amount of $2,635,000, assessing 95 percent fault to the Carbajals for Lehto’s injuries. Lehto sued Allstate for unfair claims settlement practices and a jury awarded Lehto 2.5 million dollars on the claims assigned by the Carbajals, plus $1,000,000 on Lehto’s unfair claims settlement practices claim.

The appellate court found that Allstate owed each of its insureds the same duty of good faith. Allstate could not favor the interests of one insured over the other. Settling on behalf of one insured while a third-party claimant maintained an action against another insured would permit a claimant to inject itself into the insurance relationship and introduce the issue of the insured’s relative wealth into the settlement equation.(6) Furthermore, a partial settlement would finance the case against the non-settling insured.(7)

The court found that accepting an offer on behalf of one insured would have left the other insured without coverage and would have been an act of bad faith.(8) Thus, it reversed the judgment against Allstate.

The question of how to apportion policy proceeds also was addressed in Countryman v. Seymour R-11 School Dist.(9) In that case, a public school bus operated by Nichols struck and killed Countryman. Countryman’s estate sued the school board and Nichols and obtained a judgment against both defendants for approximately $365,000. By statute, the judgment against the school board was limited to $100,000, while the full judgment remained intact against Nichols.

Cameron insured both the school board and Nichols (as a permissive user) under an automobile liability policy. Cameron’s policy limited coverage to $250,000 for the death of one person. Cameron paid into the registry of the court approximately $100,000 toward the judgment against the school board and approximately $150,000 toward the judgment against Nichols.

Countryman instituted a garnishment action, claiming that all money deposited by Cameron should be paid for the liability of Nichols under the judgment. The trial court granted Cameron’s motion for summary judgment to apportion the proceeds and dismissed the garnishment.(10)

On appeal, Countryman argued that each defendant should be responsible for half of the excess judgment. Thus, the court should allocate policy proceeds of approximately $50,000 to the school board and $200,000 to Nichols, leaving each with approximately $57,500 of the judgment unsatisfied.

The Countryman court rejected this apportionment method.(11) The court found the apportionment issue turned upon whether Nichols could require that all or a specific share of the policy proceeds should be applied toward his liability on the judgment or whether Cameron could first discharge the liability of the school board, its named insured. The court found nothing in the policy that would provide for allocation between a named insured and a permissive user/additional insured.

In determining appropriate allocation, the court analogized the situation before it to those in which multiple claimants make claims against an insurance policy inadequate to pay all claimants. In such cases, the trial judge properly makes a proportionate allocation of policy proceeds in accordance with the amount of damages suffered by each plaintiff.

Like the Smoral court, the Countryman court found that the insurance contract placed both insureds in an equal position regardless of their characterization as either named insured or additional insured. Because both insureds were on an equal footing, the court proportionately divided the proceeds so that each insured received the same percentage of protection against the liability assessed.(12)

Thus, to allocate proceeds for the judgment, the court multiplied the percentage of liability for the school board and Nichols, approximately 28% and 72%, respectively, by the amount of coverage, $250,000. The policy would therefore provide approximately $68,000 to the school board and approximately $182,000 to Nichols.

Countryman deals with proportional allocation after a jury has rendered a judgment. Countryman does not address whether and to what extent an insurer remains liable for bad faith after such proportionate allocation before judgment. An insurer may nonetheless be liable for bad faith for failure to investigate and appropriately evaluate the case so that the insurer can reasonably apportion policy proceeds before judgment. Presumably, using the Countryman formula, an insurer has a duty to determine the liability a jury would separately assess to each of its insureds before allocation of policy proceeds.

In Countryman, both the school board and Nichols were apparently jointly and severally liable, and the total amount of judgment was awarded against both of them, limited by the school board’s sovereign immunity. In the absence of sovereign immunity, both parties would have been equally liable for the $365,000 policy proceeds. According to the Countryman rationale, the court would require the carrier to pay $125,000 on behalf of each of the equally liable insureds, leaving them with equally liable for the excess judgment.

Proportional Allocation Not Required for Good Faith Settlement

Other jurisdictions hold that the failure to proportionately allocate policy proceeds is not bad faith in itself. In Country Mut. Ins. Co. v. Anderson, 628 N.E.2d 499 (Ill. App. 1993),(13) the Illinois appellate court followed this reasoning. In that case, Shumaker sustained serious injuries in a motor vehicle accident involving a truck owned and driven by Anderson. At the time of the accident, Anderson had leased the truck from Lawrence and was transporting gravel under a contract with Elmhurst.

Shumaker sued Anderson, Lawrence and Elmhurst. Anderson was insured by Country Mutual for $250,000; Lawrence was insured by Pekin for $300,000, with a $1,000,000 umbrella, and Elmhurst was insured by Wausau for $500,000. Country Mutual and Pekin tendered Shumaker policy limits and obtained dismissal of Anderson and Lawrence. Shumaker refused to release Elmhurst because neither Elmhurst nor Wausau had contributed toward settlement.

Wausau then attempted to tender Elmhurst’s defense to Country Mutual because it qualified as an insured under the omnibus clause. Country Mutual denied the tender based upon its exhaustion of policy limits in the Shumaker settlement which Country Mutual asserted relieved its duty to defend. Country Mutual filed a declaratory judgment action, seeking a declaration that its good faith settlement for policy limits discharged it from any further duty to defend or indemnify either Anderson, Lawrence or Elmhurst. Wausau alleged that Country Mutual and Pekin had wrongfully left Anderson and Lawrence exposed to third-party liability.

The trial court granted Country Mutual and Pekin summary judgment. The Illinois appellate court affirmed.(14)

The court found that it was “beyond dispute” that the conduct of Country Mutual and Pekin was in good faith and in the best interests of their insureds. The court determined that the record established that Country Mutual and Pekin foresaw potential liability for their insureds that significantly exceeded policy limits and appropriately settled with the plaintiff, obtaining a complete release for Anderson and Lawrence. While an attempt was made to secure Elmhurst into the settlement, Shumaker specifically refused to release Elmhurst unless Wausau contributed.

The court found that Country Mutual and Pekin did not leave Anderson and Lawrence improperly exposed to liability. The Anderson court found no evidence of a breach of contract or bad faith in the settlement obtained for Anderson and Lawrence with the plaintiff.

A recent Fifth Circuit decision provides a comprehensive discussion of the insurer’s dilemma when faced with a settlement of one insured’s claims that leaves its remaining insureds without protection under the policy. Travelers Indem. Co. v. Citgo Petroleum Corp.(15) The Citgo decision aligns itself with those jurisdictions holding that a carrier need only act in good faith in securing a settlement and may settle on behalf of less than all insureds.

In Citgo, Travelers Indemnity Company issued three insurance policies to Wright Petroleum: a business auto policy, a catastrophe umbrella policy and a comprehensive general liability policy). Citgo had a type of franchise agreement with Wright. Wright was a wholesaler and retailer of petroleum products. The three policies named Wright an additional insured by endorsement. Both the business auto and umbrella policies contained provisions giving Travelers the discretion to settle claims and allowing Travelers to terminate its duty to defend upon exhaustion of the policy limits.

The case originated when a collision occurred involving one of Wright’s tanker trucks. Both Wright and the other driver were killed. At the time of the accident, the truck was carrying petroleum products for Citgo. The survivors of the other driver sued Wright’s estate. Citgo was not then named as a Defendant in the suit.

Travelers defended Wright and Plaintiffs presented a settlement demand. A release was executed releasing Wright, the estate of the tanker truck driver, and all others who were then named Defendants in exchange for Travelers tending the full policy limits of $1.5 million from both the auto and umbrella policies to Plaintiffs. Plaintiffs then amended their complaint, adding Citgo, asserting negligence in its continued dealings with Wright. Citgo demanded a defense and indemnity from Travelers and Travelers refused, citing in part the exhaustion of policy limits.

Travelers then brought a declaratory judgment action seeking a determination of its duty to defend and indemnify Citgo under the three insurance policies. Citgo counterclaimed for breach of insurance contracts in violation of Texas insurance law.

Citgo alleged that Travelers breached a basic tort duty when it favored Wright over Citgo.(16) The court acknowledged that Stowers requires that an insurer accept an offer on behalf of its insured “when an ordinarily prudent insurer would do so . . .”(17) The problem with that duty, said the court, is when an insurer settles pursuant to that duty and then exposes itself to claims by insureds excluded from the settlement.(18)

The court noted that this dilemma was resolved by the Texas Supreme Court in situations involving multiple claimants.(19) In Soriano, “evidence that a larger claimant was willing to settle within policy limits (but had not then made an offer) was deemed irrelevant in the absence of evidence that the settlement reached with the other claimant, considered alone was unreasonable (citation omitted).”(20)

In situations involving multiple insureds, rather than multiple claimants, the Court noted that only two cases construing Texas law have addressed this problem. First, In American States Ins. Co. of Texas v. Arnold,(21) held that duties to additional insureds terminated when the settlement exhausted the policy limits. Second, Vitek, Inc. v. Floyd,(22) allowed for the possibility that a co-insured party might have an action against the insurer for breach of good faith under these circumstances. The Citgo court noted however, that the “Texas Supreme Court has since indicated that in such a context an action for breach of good faith against the insurer cannot be maintained.”(23)

In response to Citgo’s argument that the Vitek and Arnold decisions “insufficiently considered contrary authority” and cited to based upon Smoral v. Hanover Ins. Co. (citation omitted), the court emphasized that Smoral “has not been followed outside of New York and the California Courts of Appeals.”(24) Instead, the court agreed with the reasoning of a Missouri appeals court that “these parties contracted for this insurance policy. The clause in question is unambiguous. . . . Had Shell desired additional language providing for a continuing duty to defend upon settlement . . . it could have required [the named insured] to obtain a different policy.”(25)

Citgo argued that “when multiple insured parties rather than multiple claimants are involved, the Soriano approach will discourage settlement . . . because the partial settlements obtained under the Arnold rule do not prevent continued litigation against the exposed co-insured, with the Plaintiff now bankrolled by the proceeds of the settlement.”(26) In a footnote, the court noted Citgo’s proposal that insurers “faced with this situation should either charge an extra premium to cover the enhanced risk of excess liability whenever multiple insureds are involved or avoid such endorsements entirely.”(27) The court responded that it was “skeptical” that this would better serve the policy goal of encouraging settlement in this case.(28) If Citgo’s rule were adopted, said the court, “the only rational course for insurers would be to formerly or informally make their insureds parties to any settlement negotiations. No insurer would settle at its policy limits with potential excess liability to a disgruntled co-insured lurking in the background.”(29) The court opined that “mandatory interjection of new parties and new issues into settlements that Citgo’s rule would likely produce seems calculated to increase the cost of negotiations and decrease the likelihood of their ultimate success.”(30) The court ultimately followed the Arnold rule that an insurer is not subject to liability for proceeding, on behalf of a sued insured, with a reasonable settlement, once a settlement demand is made, even if the settlement eliminates or reduces to a level insufficient for further settlement coverage for a co-insured as to whom no demand has been made.

No Good Answer

Both the “proportional allocation” approach and the “good faith settlement” approach have drawbacks. Under the proportional allocation approach, a court following Countryman would leave each insured exposed to an excess judgment. While this may be appropriate for situations involving equally liable insureds, this method does not take into account the risks associated with potential high verdict claims from multiple claimants when a settlement is contemplated pre-suit. In a multiple claimant and multiple insured situation in which policy limits are inadequate to obtain releases for all insureds, the insurer may want to exhaust policy limits to discharge the most significant claim in its entirety for one insured, if potential “runaway” exposure is thereby extinguished for the remaining insureds.

Another problem with this approach is the assumption that insureds are accurately and appropriately able to evaluate a case and inform their insurer of their joint wishes for settlement. Insureds typically will not have the experience or resources necessary to do that. Moreover, an expectation from the insurer that the insureds do so seemingly abdicates the insurer’s good faith duties of reasonable investigation and/or defense pursuant to settlement.

Moreover, any allocation decision by the insureds would not relieve the insurer of its duties of good faith. Once the insurer has evaluated the case, its duties to minimize the exposure of its insureds would appear to require, at the very least, an explanation of why the insurer’s position with regard to proportional allocation differs from that which may be proposed by insureds. Presumably, the insureds should be able to rely on the insurer’s fulfillment of its duties to evaluate cases and appropriately minimize exposure, arising from its right to settle.

It has been suggested that when a carrier is faced with such a situation, it should offer policy limits in exchange for a release for all its insureds. If that offer is rejected, the carrier should then inform its insureds of its willingness to apply the policy limits according to their joint wishes. If the insureds cannot agree on how the money should be spent, the carrier ostensibly has a complete defense to bad faith claims.

In jurisdictions that have not adopted one or the other approach explicitly, insurers and insureds are faced with a difficult choice. In Underwriters Guaranty Ins. Co. v. Nationwide Mut. Fire Ins. Co.,(31) Green owned a car driven by Townes which struck and killed Mergens. Mergens’ estate sued Townes and Green.

Nationwide insured Green as a named insured and Townes as a permissive user/additional insured in an automobile liability policy. Townes also had an automobile policy with Underwriters Guaranty. Nationwide settled with the Mergens by paying policy limits in return for a complete release of Green. Nationwide then filed a declaratory judgment suit to determine that it had no further duty to defend Townes.

The trial court granted judgment for Nationwide, holding that it had extinguished its duty of defense by paying its policy limits and securing a release of its named insured despite the pending action remaining against Townes. The Florida appellate court affirmed.(32)

The court relied on the proposition that a insurer’s duty to defend arises solely out of contract. Because the contract relieved Nationwide of its duty to defend “any suit” upon exhaustion of liability limits, Nationwide was thus relieved of its duty to defend the additional insured.

The court specifically noted other cases addressed whether an insurer breached its duty of good faith by settling a claim against its named insured without obtaining a release of its additional insured. It found these cases did not apply because the declaratory judgment action requested only a declaration of the contractual rights under the policy and did not raise issues of bad faith. Thus, the Underwriters Guaranty case simply sidestepped the issue.


In jurisdictions whether courts have not addressed this issue, insureds and insurers have no good choice. If permitted to settle a claim for policy limits on behalf of one insured, will an insurer be liable for bad faith to its remaining insureds? Conversely, if an insurer allocates policy proceeds proportionately for each insured, is it liable for bad faith if its fails to settle of behalf of one insured when it could have done so? Unless addressed by legislatures in statutes governing bad faith and claims handling practices, this quandary will persist in jurisdictions that have not specifically adopted either approach.


  1.  An earlier version of this article appeared in the CGL REPORTER, Binder 9, 1997, and this revised article appears with the permission of the editors.
  2. 322 N.Y.S.2d 12 (N.Y. App. Div. 1971).
  3. Id. at 14.
  4. Id. at 14, 16.
  5. 31 Cal. App. 4th 60, 36 Cal. Rptr. 2d 814 (1994).
  6. Id. at 75, Cal. Rptr. 2d at 822.
  7. Id.
  8. Id.
  9. 823 S.W.2d 515 (Mo. Ct. App. 1992).
  10. Id. at 523.
  11. Id. at 520.
  12. Countryman at 523.
  13. 628 N.E.2d 499 (Ill. App. Ct. 1993).
  14. Id. at 505.
  15. 166 F.3d 761 (5th Cir. 1999).
  16. citing G.A. Stowers Furniture Co. v. American Indem. Co., 15 S.W.2d 544, 547 (Tex. 1929).
  17. Citgo at 764.
  18. Id.
  19. citing Texas Farmers Ins. Co. v. Soriano, 881 S.W.2d 312, 315 (Tex. 1994). Id. at 765.
  20. Id.
  21. 930 S.W.2d 196 (Tex. App. 1996).
  22. 51 F.3d 530 (5th Cir. 1995).
  23. citing Maryland v. Insurance, 938 S.W.2d 27, 28 (Tex. 1996).
  24. Citgo at 766.
  25. citing Millers Mutual Ins. Assoc. of Ill. v. Shell Oil Co., 959 S.W.2d 864, 869—871 (Mo. App. 1997).
  26. Id. at 767.
  27.  Id. at 767.
  28. Id.
  29. Id.
  30. Id.
  31. 578 So. 2d 34 (Fl. Dist. Ct. App. 1991).
  32. Id. at 35.